Getting at Interbrand - BD 2001

South African companies have taken to brand valuation in a big way. To our certain knowledge some twenty brands have been valued in the last eighteen months at a total value of over R7,5 billion. And quite a few more are in process. What is especially pleasing is the inclusion in these numbers of some of the world’s leading brands. Considering that there is currently no compulsion to conduct valuations either for accounting or taxation reasons, it might be mystifying to some as to what the attraction is.

While the South African Institute of Chartered Accountants (SAICA) introduced accounting standards A C 131(Business Combinations) and A C 129 (Intangible Assets) at the start of last year, neither recognises brands as assets. In fact internally generated brands are explicitly excluded since the standard writers determined that this class of intangible would be most unlikely to meet the qualifying criteria. Under some conditions acquired brands might qualify, but the guidelines to auditors makes it clear that is highly unlikely.

It is not that accountants do not want to view brands as assets it is simply that under the accounting concept that guides them, brands fail the test. Significantly the London based International Accounting Standards Board (IASB) that is the world source of standards has intangibles and acquired goodwill on its agenda as item that need attention. That the enthusiasm for valuation is explained by the possibility that amendments to these standards are imminent or that the way brands are viewed is set to change is, however, currently wide of the mark.

The uses to which valuations are being put vary from measuring the effectiveness of marketing, justifying to new owners that the brand they have bought should be retained, reporting the value that the local branch has created in South Africa to overseas’ principals, and to justify the marketing budget.

Writing in the July/August 1999 edition of Business Horizons, Karen Cravens and Chris Guilding made numerous suggestions as to why it makes sense to value brands. Among them were these that should interest local management:

· Marketers have struggled for decades to justify the money they spend on marketing communications. Brand value introduces a long-term metric that links what is spent now on the value created over time.

· Because short-term expenditures are linked to long-term value, a new measure is introduced to evaluate the performance of the managers responsible for the brands. In fact they can be rewarded by the extent to which they add shareholder value in building the brand. This shifts the way they have traditionally been evaluated from quarterly revenue and cost reporting to the impression they make on a vital corporate asset.

· Best practice valuation methodologies combine in a single model both marketing and financial inputs. The outcome therefore produces a more relevant metric that provides both marketers and accountants with a common focus.

· Market orientation of firms and the need to generate inter-functional co-ordination has become a popular topic in recent years. Brand value contributes strongly to this by establishing new fundamental operating goals related to shareholder wealth that force attention on actions that benefit the entire organisation.

· Accountants have historically had a fractious relationship with marketing largely due to poor communications and understanding between the two functions. Brand valuation has the potential to bridge this gap. It provides accountants with a new metric for use in external reporting that they can also use internally to evaluate the performance of the marketing department.

Expenditure on marketing often exceeds the money allocated for human resources and capital investment. Brand valuation introduces a metric that allows company management to evaluate how this money should be spent and whether it has produced a reasonable return.